Thank you to Pullman & Comley senior attorney, George J. Kasper, for sharing a “hot off the press” report about employee benefit plans that are offered by state and local governments. Entitled “The Blinken Report: Strengthening the Security of Public Sector Defined Benefit Plans“(The Nelson A. Rockefeller Institute of Government, State University of New York, January 2014), authors Donald J. Boyd and Peter J. Kiernan express concern about retirement arrangements for more than fourteen million workers. Citing underfunding “by at least $2 to 3 trillion using standard economic measures, and by $1 trillion using measurement practices virtually unique to the public sector pension industry,” Rockefeller Institute Senior Fellow Boyd and Schiff Hardin Attorney Kiernan assert that “[b]ad incentives and inadequate rules allowed public sector pension underfunding to develop,” thereby threatening its ability to provide core services.
Not shy about citing culprits, they talk at length about “inaccurate financial reporting.” Specifically, they address the need to value pension liabilities at discount rates that reflect the riskiness of existing and projected payments. They add that “This is separate from the question of the rate pension funds will earn on their investments.” When incorrect inputs are applied to the valuation of a defined benefit plan, there is the danger that financial statement users will think that obligations are lower than they really are. When this occurs, government budgets will not be modified accordingly, paving the way for a nasty surprise should cash flow run low. At the same time, artificially low costs can often lead to government decisions to worsen any deficit by extending new benefits and/or taking contribution holidays. Moreover, they are motivated to take higher risks on the investment side, something that the authors deem unacceptable unless “pension funds b[ear] the risk they take.” To the contrary, they write that “stakeholders in government, including current and future workers, retirees, and taxpayers, bear the risk of pension fund investments.”
Their recommendations include better reporting of future expected cash flows and balance sheet liabilities, more complete disclosure of the “potential consequences of investment risk,” reduced risk-taking with respect to the deployment of assets, steady contributions and a possible role for the U.S. government to “explore options for regulatory action by the Municipal Securities Rulemaking Board,” the U.S. Securities and Exchange Commission (“SEC”) and Congressional oversight.
The good news is that this important topic about improving pension disclosures is gaining more traction. As I have mentioned on numerous occasions, it is nearly impossible to mitigate risks when they are not properly identified and measured.